If you’re tired of shelling money to pay fees at the ATM or for your savings account, then you might be on the hunt for a new bank. If that’s the case, don’t forget to consider credit unions. They tend to offer higher rates of return on savings accounts and lower interest rates on loans. They’re also an increasingly popular choice among former bank customers interested in exploring their options. According to a January 2019 report from the Credit Union National Association, more than 118 million Americans currently use about 5,700 credit unions in the country.
What Is a Credit Union?
Federally insured credit unions hold $1.45 trillion in assets and have about 30,000 ATMs spread across the country. They tend to be much smaller than banks, which can lead to a more personal touch: The average bank is about double the size of a credit union. Unlike banks, they are nonprofits governed by their members, many of whom volunteer to serve as board members, committee members or in other roles.
A credit union is very much like a bank and offers many of the same services. For example, you can get a checking account with a debit card and a savings account. You can also invest in CDs and an IRA or get a car loan, a mortgage, a home equity loan, a credit card and other types of loans through a credit union.
Still, confusion over credit unions abound; many people falsely believe they must belong to the military or work for the government to join them, or that their savings will not be insured the same way they are in bank savings accounts.
Pros of credit unions:
— Less rigid eligibility requirements.
— Lower interest rates.
— Deposits are insured in the same way as banks.
— Greater financial literacy resources.
Cons of credit unions:
— Limited financial product offerings.
— Fewer physical branches.
How Is a Bank Different From a Credit Union?
The main difference between a bank and a credit union is that a bank is a for-profit financial institution, while a credit union is a nonprofit. The main financial services a credit union offers — including loans, checking accounts and savings accounts — are also available with traditional banks.
Pros of banks:
— Resourceful online apps, tools and features.
— Added convenience.
Cons of banks:
— Stringent eligibility requirements.
— Higher interest rates and transaction fees.
Here’s what you need to know about credit unions versus traditional banks, and the benefits and drawbacks of each financial institution.
Eligibility requirements. While credit union membership depends on belonging to a particular community, such as a workplace, region or church, most consumers are eligible, though they may not realize it. They might just need to investigate options within their communities.
So how do you find one? Websites such as MyCreditUnion.gov and aSmarterChoice.org can help. Also, ask around — your employer, spouse’s employer or local government can direct you as well.
Interest rates. On average, credit unions offer lower rates on loans and higher rates on savings accounts — just what consumers want. The National Credit Union Administration reports that as of December 2018, the five-year loans for new cars at banks had an average interest rate of 5.04 percent, compared with 3.57 percent for credit unions.
For several years now, the online banks and online credit unions are where consumers are getting higher interest rates with their savings accounts. For instance, Alliant Credit Union in March 2019 began offering an interest rate of 2.1 percent. MySavingsDirect.com, an online bank, began giving bank account holders a 2.4 percent interest rate.
Insurance coverage. Credit unions are insured by the federal National Credit Union Administration, which provides the same protections that the Federal Deposit Insurance Corporation applies to banks — insurance coverage on deposits up to $250,000. NCUA’s website allows credit union members to check on their insurance coverage; the agency also recommends checking for a prominently displayed sign at the credit union that says it is NCUA-insured.
Like banks, credit unions can fold, but that usually means they merge with another credit union. Regardless of what happens, members are protected through the NCUA insurance. NCUA says if a federally insured credit union fails, members typically receive payments for their deposits within three days.
Financial literacy resources. Credit unions pride themselves on being a top source for financial information. Many offer seminars and information on topics such as preventing identity theft and managing credit cards. Just like banks, the websites of credit unions often contain articles, tools and other resources for educating customers (or members, as they’re known within credit unions) about making smarter financial choices as well as for managing money online or getting questions answered.
Still consumers say credit unions offer a human touch that many banks can’t match. “My 72-year-old mother walked into the credit union just last week inquiring about qualifying for a new mortgage should she decide to move and sell her house. She walked out in 30 minutes with a preapproval letter good for several months. Unless you are a multimillionaire, you won’t find a single bank that can or will do that,” says Brannon Lambert, a certified financial planner and owner of Canvasback Wealth Management in Raleigh, North Carolina. “Banking when I grew up was deposits, withdrawals and basic lending,” he says. “Today, it’s about apps, cross-selling and credit cards. I recommend credit unions as much as possible to my clients.” That’s why it makes sense to add credit unions to your radar when you’re checking out all your banking options.
However, there are some drawbacks to credit unions that you’ll want to consider, including fewer physical bank branches and less technological advancements, as compared to traditional banking institutions.
Online apps, tools and digital features. “The biggest banks now have great mobile apps, thousands of ATMs, automatic check deposit, and other easy features. Most (credit unions) struggle to keep up with big banks on these services,” says Vineet Prasad, a financial coach based in Mountain View, California.
The convenience factor. Russ Nauta, the founder of the website Creditcardreviews.com based in Needham, Massachusetts, says that he banks with both a credit union and a bank, and consumers don’t necessarily have to choose one or the other. Still, he says banks often offer added flexibility and convenience.
“Larger banks do have their advantages, and it usually has to do with technology and support staff,” Nauta says. “I travel internationally quite often and have had problems with both credit unions and banks when withdrawing money from ATMs,” Nauta cautions. But the banks have been faster at resolving problems, Nauta says. “I’ve had fraud alerts put on cards from ATM withdrawals on weekends and with banks I’ve been able to get them removed quite quickly, whereas with credit unions I’ve sometimes had to wait until Monday when they reopen,” Nauta says.
Still, traditional banks have pitfalls, too. For example, it can be harder to qualify for a loan. Plus, the transaction fees, and particularly overdraft fees, have been historically higher, and interest rates for loans are typically higher as well.
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Update 03/15/19: This article was originally published on January 6, 2015, and has been updated with new information.